Friday, December 01, 2006

Can 600 economists all be wrong?

An ec 10 student recently asked me why some economists, including some prominent ones, favor an increase in the minimum wage, in light of the standard economic analysis of price floors. To avoid putting words in other people's mouths, I asked one of the leading economists who signed the open letter supporting a minimum-wage increase exactly that question.

My friend told me that he viewed the minimum wage as a second-best policy. He would prefer increased cash payments to the poor, such as a much-expanded earned income tax credit (EITC) or a more general negative income tax. But if his first-best policy was politically impossible, a minimum-wage increase was, in his view, an improvement over the status quo. He admitted that the minimum wage had adverse effects on employment, but he judged those to be modest in size. All things considered, he concluded that a higher minimum wage was better than nothing.

There is, of course, another side of this coin. Some economists, such as David Neumark, view the adverse employment effects as larger than my friend does. But, even if my friend is correct that the disemployment effects are modest, one should look at the magnitude of the anti-poverty effects. The minimum wage is not well targeted to poor families. Many minimum-wage earners are like I was in the summer of 1976: teenagers from middle-class homes with minimal skill and experience, getting their first taste of working.

Economists Richard Burkhauser (Cornell University) and Joseph Sabia (University of Georgia) report:
a beneficiary from a proposed federal minimum wage hike to $7.25 an hour is far more likely to be in a family earning more than three times the poverty line than in a poor family. In total, only 12.7 percent of the benefits from a federal minimum wage increase to $7.25 an hour would go to poor families. In contrast, 63 percent of benefits would go to families earning more than twice the poverty line and 42 percent would go to families earning more than three times the poverty line.
So even if my friend is right that the disemployment effects are modest, it seems that any benefits from the standpoint of poverty reduction are likely to be modest as well. When I asked him about this, he agreed.

As I noted in a previous post, professional economists are divided about whether the minimum wage should now be increased or eliminated. But I believe that relatively few economists would include the minimum wage as part of their first-best package of policies.